The invention is directed to a system which determines economic parameters of a high-cost, electricity-generating power plant.
Although most competition in electricity sales is currently limited to the relatively small wholesale market, strong indications point to regulatory reforms which would base the electricity prices in the larger retail market on competitive performance rather than on cost recovery, as present regulations permit. In the transition from a regulated market to a competitive one, utilities are concerned about lower cost power from other utilities and non-utility generators winning over their retail customers. In anticipation of this competition, regulated utilities are reducing their costs of operations through a variety of strategies, but even so the electricity from some high-cost power plants could remain non-competitively priced. If the situation were not corrected, some plants may be shut down and their capital costs may not be recovered by their owners. These unrecovered costs are termed "stranded assets or costs," which could represent a loss to the stock holders of billions of dollars. One resolution is reducing the fixed capital component of the high-cost plant's generating costs by accelerating its depreciation beginning in the period prior to competition. The capital cost component could possibly be reduced sufficiently to result in the plant generating electricity at a competitive total cost.
Methods for calculating "standard" depreciation rates are well established in numerous text books, tax and regulatory guides and professional publications. In the case of an electricity generating plant, methods usually consist of establishing a plant lifetime and setting the rate based on the straight-line method. These methods permit increasing and decreasing the rate only if the value or lifetime of the plant has changed. Changes in the value or lifetime must be documented in the depreciation study as occurring or having occurred. For changes in value the methods look at the retirement records of the plant components to determine whether the depreciation rate should be changed. If the useful life of a plant were seen to differ from its design life, the depreciation rate would likewise change. Most plants operate beyond their design lifetime, so their depreciation rates are more likely to be decreased than increased, as the plants pass their established lifetimes.
These conventional methods permit changes in depreciation rates based on actual changes in value or lifetime of an asset but not on anticipated changes some time in the future. Thus the concept of accelerated depreciation to meet competition in the future is a new one for industries, including electric utilities, that use conventional depreciation methods. Likewise, the concept of stranded assets is not a familiar one in a regulated industry. The regulators of the electricity industry have set the rate structure for the utility to recover its costs, including capital assets, so stranded assets could only exist with some kind of regulatory reform. Thus, the prior art of calculating CDRs and PSAs for electricity plants is either non-existent or non-relevant.
As stated above, the concepts of stranded assets and accelerated depreciation have been used in connection with utility power plants only for the last few years. In this short period of time, numerous papers and articles have been published on stranded assets and a few references have been made to accelerated depreciation of power plants. The expectation of competition in the electricity market has also caused utilities to treat much of the financial data on their generating plants confidentially, with the result that few details are provided about the analysis of the two concepts. A few financial organizations (e.g., Moody's and Resource Data International) have used public data to estimate the stranded assets of utilities which could be financially exposed in case of retail competition of electricity. These reports do not provide sufficient information about their methodology to reproduce their results. It is clear, however, that these published reports and papers take a different approach to determining CDRs and PSAs from the one presented here. Thus, a review of the available information on the calculation of CDRs and PSAs by the electricity-generating community failed to reveal any routines or any systems which are used to obtain these quantities. Thus there is no indication of any relevant prior art in the electricity generating industry.
It is conceivable that systems for determining CDRs and PSAs have been developed for other than the electricity generating industry. To be relevant to the invention presented here, the other industry(ies) must be similar in several respects to the electricity one. First, the industry must have made (or is making) the transition from a regulated one with full capital recovery to a semi- or fully deregulated one with most of its product(s) priced by actual competition. Second, the industry must be very capital intensive with units of assets having a long lifetime relative to the transition period between regulated and market environments. Lastly, the regulatory reform must potentially result in significant cost variations in the product(s) or service(s) within the affected industry, and further these variations either would exist fundamentally or would be difficult to eliminated. The industry that seems to come the closest to the electricity industry in all these respects is the U.S. airline industry that went through deregulation over a decade ago and now competes for customers in the open market. Its aircraft represent large capital assets whose life of 30+ years is much longer that the transition time of deregulation. There were and to some extent still are large cost differences in the operating expenses between the long-established airlines and the recently formed "low-cost" carriers due primarily to labor contracts. As far as known, the transition period for airline deregulation did not allow enough time to write-off any significant assets, and no provisions in the de-regulation legislation were made to recover stranded assets. The surviving established airlines used strategies such as reducing operating costs (i.e., wages), restructuring, merging and innovative marketing, etc. rather than accelerated depreciation. The non-survivors suffered large losses due to actual stranded assets.